Delean: Navigating capital gains taxes, principal residence exemption

Like a cottage or vacation condo, even if you no longer live in a house full-time, it can still be designated as a principal residence.

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Homes and cottages are being sold, transferred and converted at a brisk clip these days, and owners need to be mindful of the tax consequences. Here’s a sampling of recent questions that touch on different aspects of this topic.

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Q: We are planning to give our children the cottage that we’ve owned for the past 50 years. The capital gains are substantial. Would we be allowed to pay the taxes over more than one year?

A: If you sold it to them at fair market value, with the payments made over a period of years, it might be possible. The Canada Revenue Agency says “where proceeds are charged by the parents, and where a portion of those proceeds are deferred until a future date, the parents may be eligible for the capital gains reserve.” That would spread the taxable gain over a period of a few years (four, generally), with the taxes due annually in proportion to the payments received. But if you gift the cottage to them, or receive the full amount from a sale immediately, the capital gains taxes are payable in the tax year of the disposition. (Gifting it is equivalent to a sale in the eyes of the tax department, at the cottage’s full value.)

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Q: My spouse and I are considering moving into a retirement home later this year, but we don’t want to sell our current residence for at least a year or two. We won’t be renting out the property. It would be used by family and visiting friends. Can it still be considered a principal residence even if we move out?

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A: It can, even if you no longer live there full-time, in the same way that a cottage or vacation condominium can be a principal residence under Canadian tax rules if you designate it as such. You or your children just have to spend a bit of time “inhabiting” the house each year for it to qualify. “Even if a person inhabits a housing unit only for a short period of time in the year, this is sufficient for the housing unit to be considered ordinarily inhabited in the year by that person,” the Canada Revenue Agency says.

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Q: My spouse and I own a duplex together in which we occupy the ground floor while the upstairs apartment is rented. After our tenant left recently, we are considering taking over the upstairs for personal use. I understand that this would normally trigger a deemed sale of the rental premises and associated capital gains tax. Is there a way of deferring this tax, or avoiding it altogether, say through the application of the principal residence exemption? We won’t be selling the duplex in the foreseeable future.

A: If you want it to remain a duplex, the answer is no. The Canada Revenue Agency says a duplex is, by definition, two separate dwellings, only one of which can be occupied by the owner(s) and qualify for the principal residence exemption. To turn the full building into a principal residence, you’d have to convert it into a single municipal address. If you do go that route, you’ll still have to pay capital gains taxes of the appreciation in value of the rental unit from the time you acquired it to the year of conversion.

The Montreal Gazette invites reader questions on tax, investment and personal finance matters. If you have a query you’d like addressed, please send it by email to Paul Delean at gazpersonalfinance@hotmail.com.

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